State Coalition Approves Internet Sales Tax Plan>>
State Coalition Approves Internet Sales Tax Plan
Prospects in Legislatures, GOP Congress Uncertain
By Brian Krebs
washingtonpost.com Staff Writer
Tuesday, November 12, 2002; 5:21 PM
Revenue-hungry states today took the first step toward building a national framework for taxing items sold over the Internet.
In a meeting in Chicago, lawmakers and tax officials from 30 states -- including Virginia and the District of Columbia - endorsed a proposal to simplify their tax laws and enter into a voluntary pact to collect online sales taxes. Maryland officials present at the meeting abstained from today's vote.
"This is a 21st century system that will dramatically improve the morass that currently exists," said Utah Gov. Mike Leavitt (R), a key leader in the states' effort. "I'm confident that this agreement....will mark the beginning of a new phase of this process."
The voluntary program would take effect when at least 10 states representing 20 percent of the U.S. population have amended their laws to implement the program. Participating states would then be free to ask Congress to approve a mandatory, nationwide online sales tax regime. It's unclear, however, if Congress would go along with any online sales tax proposal.
"We think that once these states have simplified their systems it will be appropriate for the federal government to reward that effort," said R. Bruce Johnson, commissioner of the Utah state tax commission and co-chair of the implementing states group. "We're doing everything we can to make it clear that the states can work together."
Currently, 45 states and the District of Columbia levy sales taxes, with rates varying from state to state -- and often from town to town.
Under the Streamlined Sales Tax Project proposal, states would be required to establish uniform definitions for taxable goods and services, and maintain a single statewide tax rate for each type of product. The project also seeks to simplify tax reporting requirements for online sellers. Currently, there are more than 7,000 different state and local tax jurisdictions nationwide.
Today's vote is a welcome development for the nation's largest main street retailers, who have argued for years that the current system gives online vendors an edge over so-called "bricks-and-mortar" stores.
"Our ultimate goal is that everybody will have to play by the same rules," said Maureen Riehl, state and industry relations counsel for the National Retail Federation, a trade group that represents nearly 1.4 million stores.
And for states facing rising budget deficits, the stakes are huge. The U.S. General Accounting Office has estimated states lose nearly &dol;13 billion each year on untaxed Internet transactions. That figure will more than triple to &dol;45 billion by 2006, according to a 2001 University of Tennessee study conducted for the Institute of State Studies.
More Paperwork for Businesses Several unanswered questions loom large for the Internet sales tax effort, including how to win support for the proposed system from online retailers.
Most states have "use tax" laws that require people to file a special form for reporting the sales taxes they owe on items bought online, but such laws are notoriously difficult to enforce, and few people actually comply with them.
Rather than going after use taxes, all of the participating states plan to entice online merchants to collect sales taxes voluntarily by sharing with them a portion of the tax revenues that they remit. Currently, one-third of all states share sales tax revenues with online retailers, with reimbursement rates ranging from a half percent to 1.75 percent of the total taxes collected.
Revenue sharing aside, small and large Internet businesses that maintain a physical presence in just a handful of states while selling to customers nationwide are likely to balk at the costs of collecting sales taxes, said Richard Prem, director of global indirect taxation for Amazon.com.
A unified revenue-sharing model envisioned in the states' plan fails to "come anywhere close to scratching the surface of the cost" of complying with the system, he said.
Internet vendors would likely bear substantial costs just in terms of the tax preparation needed to file as many as 45 separate tax returns each year, experts contacted for this story said.
Under the states' plan, online sellers would be required to purchase approved software to compute the appropriate state and local taxes or to certify with the state any in-house calculation systems already in place. E-tailers could choose to outsource tax collection to a certified third-party under the states' plan.
So far, participating states have conducted only one tax software pilot, involving four states, three technology vendors, and one online seller.
Of the technology vendors participating in the pilot, just one -- Salem, Mass.-based Taxware, working in conjunction with Hewlett-Packard -- managed to get a system up and running.
The online store in that pilot was O.C. Tanner Co., the Salt Lake City-based company that forged the medals for the 2002 Winter Olympic Games.
O.C. Tanner tax manager Jake Garn said Taxware's software worked well, but wondered whether the system would function as smoothly when subjected to a much larger volume of queries from all 45 participating states.
"[T]his was very small transaction volume compared to the level of traffic our main business generates," Garn said.
Neither supporters nor opponents of the plan have a clear idea how much the whole collection and remittance package would cost the average Internet merchant, though the participating states plan to conduct a comprehensive study in the coming months. They also are planning to run another tax technology pilot.
Aside from the cost considerations, though, opponents of the plan say it would be tough to enforce and could infringe on consumer privacy.
"Whether I'm buying prescription drugs or sex toys online, someone is going to have to keep track of what I bought so they can figure out how to tax it," said Grover Norquist, president of Americans for Tax Reform. "How do you do this without massive violations of privacy?"
Under the states' plan, certified software vendors and service providers would calculate and report taxes without retaining the consumer's personally identifiable information. According to the proposal, that information would be kept only for items that are deemed exempt from taxation, a qualification that varies from state to state.
The sales tax effort may also pit small Internet sellers against larger operations. Larger Internet retailers that maintain offices or sales forces in the majority of the states stand the most to gain from the states' plan, the NRF's Riehl conceded. Larger retailers also are more likely to already have built in-house tax collection and remittance systems.
"The (sales tax) simplifications alone are going to amount to a net cost savings for our members," she said. "We see the reimbursements as a long overdue acknowledgement that there's a substantial cost to doing this."
Questionable Fate in GOP Congress Streamlined Sales Tax Project supporters said they expect states representing a fifth of the U.S. population to pass implementing legislation by June 2003, the end of the fiscal year for most states.
"I think by the middle of next year at least 10 states will have passed the necessary legislation, particularly when they start noticing the millions of dollars it will take to settle their deficit situations," said Neil Osten, communications director for the National Conference of State Legislatures, which fully supports the simplification effort.
It remains unclear, however, whether or when the Republican-controlled Congress would recognize the compact.
The current legal block to online sales taxes dates back to 1992, when the U.S. Supreme Court ruled that merchants cannot be required to collect sales tax unless they have a physical location in the state where the customer is located. The court said it would be unfair to require out-of-state sellers to comply with thousands of state and local tax jurisdictions across the nation. But the high court also ruled the Congress has the authority to allow states to require remote sellers to collect taxes.
In 1998 and again last year, Congress debated tying legislation to reward the states' efforts -- should enough of them simplify their tax systems -- to a bid to extend a ban on Internet-specific taxes, such as taxes on Internet access fees. In each case, Congress voted to extend the ban without including the simplification incentives.
A least one influential opponent of the effort is already planning legislation that would keep the Internet access tax ban from being "taken hostage" as a vehicle for considering the states' proposal.
Sen. George Allen (R-Va.) said the first piece of legislation he will introduce next year would be a standalone bill to permanently extend the ban on new Internet-specific taxes.
"If the states want to come up with their own simplification schemes, that's fine. But that still doesn't make it right to require someone who has no representation in your state to pay taxes there," said Allen, who heads the Senate Republican High-Tech Task Force.
Leavitt and other supporters of the proposal disputed arguments such as Allen's.
"It ignores the fact that sales and use taxes aren't imposed on people who collect them, they are paid by the people doing the buying," Leavitt said.
In the meantime, online retailers would be wise to seize the revenue-sharing incentives included in the states' plan before it's too late, O.C. Tanner's Garn said.
"If the states are right, and enough business shifts online that it creates a much larger cost disadvantage, the states may then have the political muscle they need to get Congress to back this without any" revenue sharing for retailers, he said. "Maybe it's a good thing to try to see the future and work for a mutual solution."
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